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Kraft Heinz ( KHC ) splits into condiments, shelf stable meals and

grocery units

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Breakups aim for simpler, focused businesses with higher

valuations

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Post-COVID, split valuations fell, challenging breakup

success

By Abigail Summerville

Sept 3 - Investment bankers had pitched a breakup to

Kraft Heinz ( KHC ) for years without success, sources said. The company

finally agreed to a split when it realized that two simpler

companies would be easier to manage and understand, garnering

higher stock prices.

This strategy is gaining momentum in the world of food &

beverage conglomerates.

The consumer food company's separation into two - one

focused on condiments like Heinz ketchup, the other on grocery

food brands like hot dog maker Oscar Mayer - results from

multiple points of pressure. But perhaps more than anything

else, it reflects a changing view that bigger is not always

better, because businesses with the most growth potential can

get overlooked.

"Big guys have trapped value because they can't buy

something that moves the needle and do it right, or because

they're already too large," said one consumer M&A banker.

"The complexity of our business has impacted their ability

to realize the full strength of our brands and operations,"

Kraft Heinz ( KHC ) CEO Carlos Abrams-Rivera, who is due to lead the

grocery business, said on an investor call on Tuesday.

Kraft Heinz's ( KHC ) decision, announced on Tuesday, follows

similar moves by peers.

Kellogg split up in 2023, renaming its snacks business

Kellanova ( K ) and the cereals unit WK Kellogg. Family-owned candy

maker Mars bid $36 billion last year to acquire Kellanova ( K ).

Ferrero made a deal to buy WK Kellogg this year.

Just last week, Keurig Dr Pepper ( KDP ) announced plans to

combine with JDE Peet's and then separate its cold beverage and

coffee divisions, citing differing growth profiles. And Unilever ( UL )

is spinning off and listing separately its Magnum-led ice cream

business which includes popular brands such as Magnum and Ben &

Jerry's ( UL ).

For bankers, the rationale behind these breakups is

clear: focused, pure-play businesses are easier for capital

markets to value and can pursue targeted M&A.

Since Kellanova ( K ) and WK Kellogg started trading separately in

October 2023, each company's stock has gained around 20% and

27%, respectively, before news broke of their acquisitions.

Kellanova ( K ) fetched a 44% premium to its unaffected 30-trading day

volume-weighted average price, while WK Kellogg's premium was

40%.

Kraft Heinz ( KHC ) has been trading at a price-earnings ratio

of about 11, while more focused Mondelez ( MDLZ ) and McCormick ( MKC ) are in

the low 20s. That dynamic has been part of bankers' pitches to

Kraft Heinz ( KHC ) for years, sources said. Warren Buffett's

longstanding investment in the company through Berkshire

Hathaway ( BRK/A ) protected it from activist pressure to break up, but

that faded when Berkshire directors left the board in May, the

sources said.

Berkshire still owns around 27.4% of the company and

Buffett on Tuesday

told CNBC

he was disappointed by the breakup.

Kraft Heinz ( KHC ) declined to comment beyond the public

materials released on Tuesday.

Breakup success is not guaranteed, though, and that has been

the case especially since the COVID pandemic, according to

research by JP Morgan. In a recent review, the bank looked at

companies that split up and found that before COVID,

price-earnings valuations generally expanded by 10%, to 9.9 from

9, compared with their parent firm. After COVID, the valuations

fell by 5% to 10.4 from 11.

For food & beverage conglomerates, pressure is mounting to

grow organically and drive volume in the face of changing

consumer preferences away from processed foods.

Cost savings have long driven mergers, although the

enthusiasm for the Kraft Heinz's ( KHC ) 2015 deal quickly faded, said

another banker familiar with the company. "When Kraft Heinz ( KHC ) came

together, in that moment of time, the view was: we're cutting

costs everywhere. So all the organic investment in big consumer

packaged goods almost bled out and moved outside the

organizations," the banker said.

Kraft Heinz's ( KHC ) decision reflects a broader challenge for

large industry players. And M&A bankers said consumer packaged

goods clients continue to ask if a separation is right for them.

"Now that we have a handful of examples, it could drive more

traction with companies who have disparate portfolios," a third

banker said. "It's been more challenging because consumers are

truly behaving quite differently. There's lots of active debate

about what makes sense on the chessboard here."